Bankruptcy: Dischargeability of Debts - Company Funded & Controlled by Wife

     In the case of Old National Bank v. Reedy, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, denied a complaint against dischargeability. In Reedy the debtor, a consultant on obtaining government contracts, had financial difficulties in his prior business operations. One year before he filed for bankruptcy, the debtor’s wife agreed to assist him from her own financial resources by capitalizing and operating a company in which she was the sole shareholder and through which husband could perform his consulting work. The creditor bank had argued that the establishment and operation of this business was a transfer with intent to defraud creditors. 

     The Court held that the case was devoid of any direct testimony by the debtor concerning specific intent to delay, hinder or defraud his creditors. Instead, there was credible evidence regarding the legitimate business purpose of setting up and operating the corporation in its present form. 

     In Reedy the debtor's wife completely capitalized the business and maintained the books and records while the debtor performed consulting services. Such control was a condition to the debtor's wife's capital contribution. Moreover, the debtor's wife initiated the incorporation of the business and had been the only stockholder since its inception. No transfer of stock ever occurred. 

     In summary, the Court denied the creditor's request for two reasons. First, there was no transfer of property by the debtor. Although the debtor had earned some consulting commissions, there was no evidence that he had an established business or that he transferred a business to the corporation. He merely went to work for and rendered services to a new employer. There was no basis in the trial record for the Court to ignore the business as a separate and independent entity. The business's receipts of consulting income did not constitute transfers by the debtor. Second, there was no intent by the debtor to hinder or delay his creditors. The formation of the business by the wife almost a full year before the debtor filed bankruptcy served a legitimate business purpose of enabling the debtor's wife to assist him in dealing with his financial problems. The Court found that the new arrangement removed the debtors' ability to make imprudent financial decisions and gave wife the reassurance she needed if she was to assist him from her own independent financial resources.

Collections: Notice of Sale of Security Interest

     The case of The State Bank of the Alleghenies v. Hundall, decided by the United States District Court at Roanoke, Virginia, serves as a good example of what happens where a creditor sells items pledged as security for a loan without making proper notice to all parties. 

     In Hundall, the defendant guaranteed the bank's loan to his brother for a dry-cleaning business, but the defendant guarantor never received notice of how, when and by what manner of sale the bank intended to sell motor vehicles belonging to the brother's business. The evidence taken clearly proved that the bank failed to send notice of the sale of the motor vehicles, which had a fair wholesale value of approximately $8,500.00 in the aggregate. The District Court ruled that this violated the provisions of Virginia Code §8.9-504(3); however, the Code does not provide a remedy for the failure to comply with the statutory provisions for resale, and the appropriate remedy had not been ruled upon by the Virginia Supreme Court. The District Court, in its ruling, cited that courts which have addressed this appropriate remedy for failure to provide notice have adopted one (1) of the following three (3) rules: 

       1. The debtor must prove that he has suffered an injury in order to obtain any recovery against the secured party; 

   2. The secured party is absolutely barred from recovering a deficiency, even if the debtor suffered no injury; and 

     3. A rebuttable presumption is that the collateral was worth the amount of the debt which requires the secured party to prove that the debtor suffered no injury. 

     Virginia Code §8.9-507(1) entitles the debtor, or any person entitled to notification, "to recover from the secured party any loss caused by the failure to comply with the provision of this part". 

     The Court elected the third of the three remedies listed above, and forced the creditor to prove the fair value of the collateral. 

     The lesson of Hundall: creditors should send notice to all parties to the transaction -- the principal debtors, guarantors and the owners of the collateral. 

Foreclosure: Sale Price and Delays in Sale

     The trustee is under a duty to “use all reasonable diligence to obtain the best price.” 

     If the trustee determines that in order to fulfill his fiduciary duty to realize the highest price for the property, a recess is necessary, he or she should recess the sale. Arguably, the recess is within the scope of the discretion afforded trustees in the conduct of the foreclosure sale. For example, if a bidder who previously advised the trustee of his interest in bidding on the property is delayed, the trustee, in his discretion, may recess the sale to a later hour on the same day to allow the bidder to attend the sale. If the trustee fails to accommodate the bidder and the property is sold for a price less than the bidder was willing to pay, the trustee may have breached his duty to “use all reasonable diligence to obtain the best price.” A decision by the trustee to recess the sale, however, should not impair the sale by making it impossible or impracticable for the bidders to appear and bid at the recessed sale.

     The postponement of a foreclosure sale to a different day is not a recess and is governed by statute. Virginia Code §55-59.1(D) provides that the trustee, in his discretion, may postpone the sale to a different day, and no new or additional “notice” must be given. Presumably, the “notice” referred to in this section is notice of the postponement. The trustee needs only to announce at the sale that it has been postponed. §55-59.2(D) provides that if the sale is postponed, the trustee must advertise the “new” sale in the same manner as the original advertisement. Read in conjunction, these sections require the trustee who postpones the foreclosure to re-advertise the sale in the same manner as the original sale was advertised. Although the secured obligation will not need to be accelerated again, all other aspects of the foreclosure must be completed. Effectively, a postponed sale is a new sale in which the trustee must complete all acts that he or she completed in the first sale.

Real Estate: The Virginia Property Owners' Association Act - An Introduction

   The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In another blog, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations. Subsequent issues will address memorandum of liens and foreclosures.